While others are deferring their fund-raising plans, Alok Sama, Founder and President of Baer Capital Partners, is gearing up to launch a private equity fund called Beacon India Private Equity Fund II. The company recently launched an India focussed long/short hedge fund. In an interview with Vandana, Sama said the PE scene in India is a game of value-oriented stock picking rather than leveraged buyouts, a pet strategy of western PE majors. Excerpts:
How has the sub-prime crisis impacted the private equity landscape in India and other emerging markets?
The liquidity crunch has been devastating for the buyout business in the western world as leverage was a major driver of such deals. The impact on India and emerging markets has been less direct as private equity in India and emerging markets is primarily driven by growth capital rather than buyouts. In fact, for those who have kept their powder dry over last 2 years - and that certainly includes our PE fund - the environment has actually improved since valuations are down substantially.
Which are the most attractive sectors from a PE perspective?
The PE investors generally take a long-term perspective. They are frequently driven by the domain expertise of relevant teams as they endeavour to add value to investee companies rather than invest passively. As such, the sectoral focus does not vary according to market movements. We are focussed on the infrastructure services and consumer-oriented business, two sectors that represent the heart of the India growth story.
What strategy would be adopted by your hedge fund, given the fact that hedge funds are withdrawing money from Asia and posting negative returns?
The term “hedge fund” is used rather loosely and frequently misunderstood in India and elsewhere. Our hedge fund is focused exclusively on Indian equities, and is a long-biased equity fund that will be at least 70 per cent long at all times, relying primarily on superior stock selection to generate outperformance or “alpha”.
The short or “hedge” aspect of the fund is more of a defensive macro overlay to protect the gains in our portfolio. My good friend and our local advisor BP Singh likes to say that being asked to manage money in India without any type of short mandate was like asking Sachin to face up to Brett Lee without a helmet. This is an excellent analogy as the hedge aspect is a defensive weapon that adds to the confidence and performance of the manager.
The macro funds that drove billions in liquidity into the Indian and Chinese markets were driven by market momentum more than anything else, and their economics relied heavily on the carry-trade borrowing in Japanese yen and investing in emerging markets. This trade is dead, much like the mega leveraged buyout. From our perspective, this was not a game we ever played or intend to play.
What are your plans on launching other funds?
We are totally focused on raising money for the Beacon Alpha Equity Fund (our hedge fund) and Beacon India Growth Fund (which is a long-only daily liquidity product). We are also thinking about a follow-on private equity fund - Beacon India Private Equity Fund II - since we are fairly advanced in the deployment of Fund I.
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What is the sense you are getting from LPs and investors abroad about Indian markets?
There is certainly much more caution than was the case a year ago. Much of it is risk aversion generally. But there are many India specific concerns - inflation and higher interest rates, a depreciating currency, fiscal deficit, margin pressures and macroeconomic impact of the oil shock. I think it is fair to say the tide has turned. So I am certainly not expecting a return to the heady days of 2007. Having said that, investors continue to believe in the India growth story over the medium and long term, and the reception to our team and strategy has been uniformly positive.
What are the broad PE trends in 2008?
An increasing number of market practitioners are talking about buyouts, but not necessarily based on leverage. This is intriguing. Expect more activity in this space over the next year.
New PE firms are setting up shop in India in spite of a slowdown. What does this indicate?
The global PE funds face a real challenge in deploying the billions raised at the height of the liquidity boom. Their deal flow in the Western world - driven to a great extent by the availability and pricing of leverage - has all but dried up, and hence they are seeking new markets and avenues to deploy the capital. Their success and failure in India will obviously depend on the people they empower to lead their efforts and strategy. People such as Warburg Pincus have adapted well, but most struggle in a completely different environment.
The global funds are not familiar with the India PE scene, which is a game that is much more akin to value-oriented stockpicking than leveraged buyouts. We tend to be fairly insular in our thinking - this is not a market share or size game for us.
With proprietary relationships, we will be able to execute 4-5 sensibly priced quality deals a year and that’s all our investors expect of us. So I personally see no great implications one way or the other.
